SHARING ECONOMY INTERNATIONAL INC. - Quarter Report: 2008 June (Form 10-Q)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o (Do not check if smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 40,399,974 shares of common stock are issued and outstanding as of August 12, 2008.

 

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CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

June 30, 2008

 

TABLE OF CONTENTS

				Page No.
PART I. - FINANCIAL INFORMATION
Item 1.		Financial Statements		1
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3		Quantitative and Qualitative Disclosures About Market Risk		39
Item 4		Controls and Procedures		39
PART II - OTHER INFORMATION
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 6.		Exhibits		41

 

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FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-KSB, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Quarterly Report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

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PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements.

CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		June 30,			December 31,
		2008			2007
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	2,274,524		$	5,025,434
Accounts receivable, net of allowance for doubtful accounts			4,037,060			2,158,412
Inventories, net of reserve for obsolete inventory			2,992,334			1,929,796
Advances to suppliers			332,707			938,331
Prepaid expenses and other			124,051			378,429
Total Current Assets			9,760,676			10,430,402
PROPERTY AND EQUIPMENT - Net			8,802,673			6,525,986
OTHER ASSETS:
Deposit on long-term assets - related party			5,993,550			10,863,706
Deposit on long-term assets			2,725,487			-
Intangible assets, net of accumulated amortization			6,127,043			502,634
Investment in cost method investee			-			34,181
Due from related parties			47,581			139,524
Total Assets		$	33,457,010		$	28,496,433
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable		$	1,018,656		$	820,333
Convertible debt, net of discount on debt			-			3,261,339
Accounts payable			1,841,809			1,845,769
Accrued expenses			191,201			198,542
VAT and service taxes payable			225,417			434,839
Advances from customers			83,226			77,357
Due to related party			-			98,541
Income taxes payable			617,448			508,407
Total Current Liabilities			3,977,757			7,245,127
STOCKHOLDERS' EQUITY:
Series A convertible preferred ($0.001 par value; 60,000,000 shares authorized;14,028,189 and 0 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively)			14,028			-
Common stock ($0.001 par value; 150,000,000 shares authorized;39,656,241 and 37,384,295 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively)			39,657			37,385
Additional paid-in capital			12,810,998			3,488,896
Retained earnings			13,235,643			16,074,270
Statutory reserve			421,360			305,472
Other comprehensive gain - cumulative foreign currency translation adjustment			2,957,567			1,345,283
Total Stockholders' Equity			29,479,253			21,251,306
Total Liabilities and Stockholders' Equity		$	33,457,010		$	28,496,433

 

See notes to unaudited consolidated financial statements

1

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CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
		2008			2007			2008			2007
NET REVENUES		$	11,182,950		$	4,459,972		$	19,630,024		$	8,589,182
COST OF SALES			8,419,505			3,135,450			14,692,331			6,197,569
GROSS PROFIT			2,763,445			1,324,522			4,937,693			2,391,613
OPERATING EXPENSES:
Depreciation and amortization			141,568			67,464			219,588			139,268
Selling, general and administrative			589,420			235,951			1,205,988			342,942
Total Operating Expenses			730,988			303,415			1,425,576			482,210
INCOME FROM OPERATIONS			2,032,457			1,021,107			3,512,117			1,909,403
OTHER INCOME (EXPENSE):
Interest income			4,011			180			9,644			281
Interest expense			(18,753	)		(13,366	)		(2,278,447	)		(21,414	)
Debt issuance costs			-			-			(21,429	)		-
Total Other Income (Expense)			(14,742	)		(13,186	)		(2,290,232	)		(21,133	)
INCOME BEFORE INCOME TAXES			2,017,715			1,007,921			1,221,885			1,888,270
INCOME TAXES			606,531			301,670			1,060,562			600,254
NET INCOME			1,411,184			706,251			161,323			1,288,016
DEEMED PREFERRED DIVIDEND			-			-			(2,884,062	)		-
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS		$	1,411,184		$	706,251		$	(2,722,739	)	$	1,288,016
COMPREHENSIVE INCOME:
NET INCOME		$	1,411,184		$	706,251		$	161,323		$	1,288,016
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain			605,039			141,135			1,612,284			224,296
COMPREHENSIVE INCOME		$	2,016,223		$	847,386		$	1,773,607		$	1,512,312
NET INCOME (LOSS) PER COMMON SHARE:
Basic		$	0.04		$	0.02		$	(0.07	)	$	0.04
Diluted		$	0.02		$	0.02		$	(0.07	)	$	0.04
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			38,036,208			36,577,704			37,760,355			36,577,704
Diluted			65,712,820			36,577,704			37,760,355			36,577,704

 

See notes to unaudited consolidated financial statements

2

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CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
	(Unaudited)

 

		For the Six Months Ended
		June 30,
		2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	161,323		$	1,288,016
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation and amortization			389,684			299,451
Amortization of debt discount to interest expense			2,263,661			-
Amortization of debt offering costs			21,429			-
Increase in allowance for doubtful accounts			170,024			133,693
Increase in reserve for inventory obsolescence			-			71,853
Stock based compensation expense			75,000			-
Changes in assets and liabilities:
Accounts receivable			(1,860,346	)		(1,706,864	)
Inventories			(911,684	)		580,971
Prepaid and other current assets			235,398			71,321
Advances to suppliers			647,106			(860,923	)
Accounts payable			(137,507	)		781,112
Accrued expenses			3,085			(6,938	)
VAT and service taxes payable			(230,670	)		461,352
Income taxes payable			74,150			603,112
Advances from customers			864			1,231,834
NET CASH PROVIDED BY OPERATING ACTIVITIES			901,517			2,947,990
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in due from related parties			98,058			(3,523,139	)
Proceeds from sale of cost-method investee			35,348			-
Deposit on long-term assets - related party			(88,783	)		-
Deposit on long-term assets			(2,648,096	)		-
Purchase of property and equipment			(2,126,847	)		(7,740	)
NET CASH USED IN INVESTING ACTIVITIES			(4,730,320	)		(3,530,879	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable			141,390			258,736
Proceeds from exercise of warrants			854,340			-
Payments on related party advances			(101,905	)		-
NET CASH PROVIDED BY FINANCING ACTIVITIES			893,825			258,736
EFFECT OF EXCHANGE RATE ON CASH			184,068			6,182
NET DECREASE IN CASH			(2,750,910	)		(317,971	)
CASH - beginning of year			5,025,434			421,390
CASH - end of period		$	2,274,524		$	103,419
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	35,505		$	21,414
Income taxes		$	1,169,603		$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deemed preferred dividend reflected in paid-in capital		$	2,884,062		$	-
Convertible debt converted to series A preferred stock		$	5,525,000		$	-
Deposit on long-term assets -related party reclassified to intangible assets		$	5,500,030		$	-
Series A preferred converted to common shares		$	759		$	-

 

See notes to unaudited consolidated financial statements.

3

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CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

China Winds Systems, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc.

On November 13, 2007, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) among Fulland Limited, a Cayman Islands corporation (“Fulland”), the stockholders of Fulland, and Synergy Business Consulting, LLC (“Synergy”), the then principal stockholder of the Company, pursuant to which, simultaneously with the financing described in Note 6, the Company (i) issued 36,577,704 shares of common stock to the former stockholders of Fulland, (ii) purchased 8,006,490 shares of common stock from Synergy for $625,000 and cancelled such shares, (iii) issued Synergy 291,529 shares of common stock for professional services, and (iv) paid cash fees of $415,000 in connection with the Exchange Agreement. The Company paid $1,040,000 from the proceeds of the financing for closing costs, including the $625,000 paid for shares from Synergy. At the time of the closing, under the Exchange Agreement and the financing, the Company, then known as Malex, Inc. was not engaged in any business activity and was considered a blank check shell.

The Company is the sole stockholder of Fulland. Fulland owns 100% of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”), which is a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”). Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Dye Machine Co., Ltd. (“Huayang Dye Machine”) and Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Huayang Electrical Power Equipment”, and together with Huayang Dye Machines, sometimes collectively referred to as the “Huayang Companies”), both of which are limited liability companies headquartered in, and organized under the laws of, the PRC.

Fulland is a limited liability company incorporated under the laws of the Cayman Islands on May 9, 2007, which was formed by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua Tang, submitted their application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish an offshore company, Fulland, as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.

In 2007, the Company recapitalized the Company to give effect to the share exchange agreement discussed above. Under generally accepted accounting principles, the acquisition by the Company of Fulland is considered to be capital transactions in substance, rather than a business combination. That is, the acquisition is equivalent, to the acquisition by Fulland of the Company, then known as Malex, Inc., with the issuance of stock by Fulland for the net monetary assets of the Company. This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse takeover accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Fulland. Since Fulland and Greenpower did not have any business activities, the Company’s financial statements prior to the closing on the reverse acquisition, reflect only business of the Huayang Companies. The accompanying financial statements reflect the recapitalization of the stockholders’ equity as if the transactions occurred as of the beginning of the first period presented. Thus, the 36,577,704 shares of common stock issued to the former Fulland stockholders are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition.

4

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CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

 

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Wuxi Huayang Dyeing Machinery Co., Ltd.

Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) is a Chinese limited liability company and was formed under laws of the People’s Republic of China on August 17, 1995. Dyeing produces a variety of high and low temperature dyeing and finishing machinery.

Wuxi Huayang Electrical Equipment Co., Ltd.

Wuxi Huayang Electrical Equipment Co., Ltd. (“Electric”) a Chinese limited liability company and was formed under laws of the People’s Republic of China on May 21, 2004. Beginning in April 2007, Electric began to produce large-scaled forged rolled rings for the wind-power and other industries that are up to three meters in diameter. Commencing in 2008, the sale of rolled rings accounted for more than 85% or Electric’s revenue. As a result, we are referring to this segment of our business as the forged rolled rings and electric power equipment division. In addition to forged rolled rings, Electric continues to manufacture electric power auxiliary apparatuses (including coking equipment) and provide of related engineering services. Electric equipment products mainly include various auxiliary equipment of power stations, chemical equipment, dust removal and environmental protection equipment, and metallurgy non- standard equipment.

As a result of the transaction effected by the Exchange Agreement, the Company’s business has become the business of the Huayang Companies.

Contemporaneously with the closing under the Exchange Agreement, the Company sold its 3% convertible notes in the principal amount of $5,525,000 to an investor group. Pursuant to the securities purchase agreement relating to the issuance of the convertible notes, on March 28, 2008, the Company amended and restated its certificate of incorporation to provide for the authorization of a class of preferred stock with the directors having the right to designate one or more series of preferred stock and set the rights, preferences, privileges and limitations of each such series and set forth the rights, preferences, privileges and limitations of a series of preferred stock designated as the series A convertible preferred stock (“series A preferred stock”). The notes were, by their terms, automatically converted into 14,787,135 shares of series A preferred stock and warrants to purchase a total of 18,829,756 shares of common stock upon the filing the restated certificate of incorporation. (See Note 6 and 9).

Basis of presentation

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-KSB annual report for the year ended December 31, 2007.

The accompanying unaudited condensed consolidated financial statements for China Wind Systems, Inc., its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland and Greenpower, as well as the financial statements of Huayang Companies, Dyeing and Electric. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

5

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CHINA WIND SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

·	There are 60,000,000 authorized shares of series A preferred stock.

·

No dividends shall be payable with respect to the series A preferred stock. No dividends shall be declared or payable with respect to the common stock while the series A preferred stock is outstanding. The Company shall not redeem or purchase any shares of Common Stock or any other class or series of capital stock which is junior to or on parity with the Series A Preferred Stock while the Series A Preferred Stock is outstanding.

·

The holders of the series A preferred stock have no voting rights except as required by law. However, so long as any shares of series A preferred stock are outstanding, the Company shall not, without the affirmative approval of the holders of 75% of the shares of the series A preferred stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the series A preferred stock or alter or amend the statement of designations relating to the series A preferred stock, (b) authorize or create any class of stock ranking as to dividends or distribution of assets upon a liquidation senior to or otherwise pari passu with the series A preferred stock, or any of preferred stock possessing greater voting rights or the right to convert at a more favorable price than the series A preferred stock, (c) amend its certificate of incorporation or other charter documents in breach of any of the provisions hereof, (d) increase the authorized number of shares of series A preferred stock or the number of authorized shares of preferred stock, or (e) enter into any agreement with respect to the foregoing.

·	Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of he series A preferred stock have a liquidated preference of $.374 per share.

·

Each share of series A preferred stock shall be initially convertible (subject to the 4.9% limitations described below) into such number of shares of common stock based on the conversion ratio of one share of series A preferred stock for one share of common stock at the option of the holders, at any time after the original issue date.

·

All of the outstanding shares of series A preferred stock shall be automatically converted into common stock upon the close of business on the business day immediately preceding the date fixed for consummation of any transaction resulting in a change of control of the Company, as defined in the statement of designation.

·	The holders may not convert the series A preferred stock to the extent that such conversion would result in the holder and its affiliates beneficially owning more than 4.9% of the Company’s common stock. This provision may not be waived or amended.

·

The Company agreed to have appointed such number of independent directors that would result in a majority of its directors being independent directors, that the audit committee would be composed solely of not less than three independent directors and the compensation committee would have at least three directors, a majority of which shall be independent directors within 90 days after the closing, which was February 11, 2008. Failure to meet this date will result in liquidated damages commencing February 12, 2008, until the date on which the requirement is satisfied. Thereafter, if the Company does not meet these requirements for a period of 60 days for an excused reason, as defined in the Purchase Agreement, or 75 days for a reason which is not an excused reason, this would result in the imposition of liquidated damages. The investors have agreed to waive any liquidated damages related to the initial appointment of independent directors and the establishment of the committees which occurred in March 2008.

·

The Company agreed to have a qualified chief financial officer who may be a part-time chief financial officer until February 13, 2008. If the Company cannot hire a qualified chief financial officer promptly upon the resignation or termination of employment of a former chief financial officer, the Company may engage an accountant or accounting firm to perform the duties of the chief financial officer. In no event shall the Company either (i) fail to file an annual, quarter or other report in a timely manner because of the absence of a qualified chief financial officer, or (ii) not have a person who can make the statements and sign the certifications required to be filed in an annual or quarterly report under the Securities Exchange Act of 1934.

·

Liquidated damages for failure to comply with the preceding two covenants are computed in an amount equal to 12% per annum of the purchase price, up to a maximum of 12% of the purchase price, which is $663,000, which is payable in cash or series A preferred stock, at the election of the investors. If payment is made is shares of series A preferred stock, each share is valued at $.374 per share.

·

The Company and the investors entered into a registration rights agreement pursuant to which the Company agreed to file, by January 12, 2008, a registration statement covering the common stock issuable upon conversion of the series A preferred stock and exercise of the warrants and to have the registration statement declared effective by June 11, 2008. The failure of the Company to have the registration statement declared effective by June 11, 2008 and other timetables provided in the registration rights agreement would result in the imposition of liquidated damages, which are payable through the issuance of additional shares of series A preferred stock at the rate of 4,860 shares of series A preferred stock for each day, based on the proposed registration of all of the underlying shares of common stock, with a maximum of 1,770,000 shares. The number of shares issuable per day is subject to adjustment if the Company cannot register all of the required shares as a result of the Securities and Exchange Commission’s interpretation of Rule 415. The registration rights agreement also provides for additional demand registration rights in the event that the investors are not able to register all of the shares in the initial registration statement.

·	The Investors have a right of first refusal on future financings.

·	Until the earlier of November 13, 2011 or such time as the Investors shall have sold all of the underlying shares of common stock, the Company is restricted from issuing convertible debt or preferred stock.

·	Until the earlier of November 13, 2010 or such time as the Investors have sold 90% of the underlying shares of common stock, the Company’s debt cannot exceed twice the preceding four quarters earnings before interest, taxes, depreciation and amortization.

·	The Company’s officers and directors agreed, with certain limited exceptions, not to publicly sell shares of common stock for 27 months or such earlier date as all of the convertible securities and warrants have been converted or exercised and the underlying shares of common stock have been sold.

·

The Company entered into an escrow agreement pursuant to which the Company issued into escrow its 3% convertible promissory note due March 31, 2008 in the principal amount of $3,000,000. Upon the filing of the Restated Certificate this note automatically was converted into 24,787,135 shares of series A preferred stock. These shares of series A preferred stock are in addition to the 14,787,135 shares of series A preferred stock issued to the investors upon conversion of the convertible notes held by them. The series A preferred stock is to be held in escrow subject to the following.

·

14,787,135 shares are held pursuant to the following provisions. If, for the year ended December 31, 2008, the Company’s pre-tax earnings per share are less than the target numbers, all or a portion of such shares are to be delivered to the Investors. The agreement also had a target for 2007, which was met, and no shares were delivered with respect to 2007. If the pre-tax earnings are less than 50% of the target, all of the shares are to be delivered to the Investors. If the shortfall is less than 50%, the number of shares to be delivered to the Investors is determined on a formula basis.

·	The target number for 2008 is $0.13131 per share. The per share numbers are based on all shares that are outstanding or are issuable upon exercise or conversion of all warrants or options, regardless of whether such shares would be used in computing diluted earnings per share under GAAP.

·	If the Company does not file its Form 10-K for 2008 within 30 days after the filing is required, after giving effect to any extension permitted by Rule 12b-25 under the Securities Exchange Act of 1934, any shares remaining in escrow shall be delivered to the Investors.

·

The remaining 10,000,000 shares of series A preferred stock are to be delivered to the Investors in the event that, based on the Company’s audited financial statements for 2007 and 2008 the Company or certain affiliated companies owes any taxes to the PRC government or any authority or taxing agency of the PRC for any period ended on or prior to September 30, 2007. For each $1.00 of such tax liability, four shares of series A preferred stock are to be delivered to the Investors. At December 31, 2007, the Company did not have any tax liabilities for the period ended on or prior to September 30, 2007.

·

With certain exceptions, until the Investors have sold all of the underlying shares of Common Stock, if the Company sells common stock or issues convertible securities with a conversion or exercise price which is less than the conversion price of the preferred stock, the conversion price of the series A preferred stock and the exercise price of the warrants is reduced to the lower price.

·

In connection with the Securities Purchase Agreement, $30,000 was deducted from the gross proceeds and was paid to an investor as reimbursement for due diligence expenses, which was deferred as a debt discount and was amortized over the life of the convertible notes. Other fees incurred in connection with the debt issuance include $25,000 of legal fees, which were treated as a deferred debt issue costs and are being amortized to debt issue cost expense over the life of the notes. The unamortized portion of this debt discount on March 28, 2008, the date on which the convertible notes were automatically converted, was recognized at that time.

(a)

In May 2007, the Company sold its 33% interest in Boiler to an individual related to the Company’s chief executive officer for 500,000 RMB or approximately $65,000. The remaining 67% of Boiler is owned by the spouse and son of the Company’s chief executive officer. The amount outstanding at June 30, 2008 reflects the unpaid receivable from the sale. No amount is shown at December 31, 2007, since Boiler’s obligation to the Company was offset by the Company’s obligation to Boiler.

(a)

The Company does not allocate and general and administrative expenses of its US activities to its reportable segments, because these activities are managed at a corporate level. Additionally, other identifiable assets represents assets located in the United States and are not allocated to reportable segments

·	The increase in revenues from the sale of dyeing and finishing equipment was attributable to continued strong sales of our equipment to the textile industry.

·

We have experienced an increase in revenues from the sale of forged rings to the other industries such as the railway, heavy machinery manufacturing, petrochemical, metallurgical, sea port machinery, and defense and radar industry. This source of revenue was nominal for the six months ended June 30, 2007.

·

Revenue from the sale of forged rings to the wind power industry, which was nominal in the six months ended June 30, 2007 increased to $2.6 million and is attributable to the demand for our forged rolled rings that will be used in the production of wind turbine components such as gear boxes and yaw bearings. The wind power industry is experiencing such tremendous growth that the industry is facing a serious shortage of various components, principally gearboxes and bearings.

·	The increase in revenues from the sale of standard and custom auxiliary equipment for use in the power industry in China is attributable to the continued sale of additional pieces of equipment to the power industry.

·

Since the share exchange in November 2007, we have incurred professional fees, principally as a result of our status as a public company. For the six months ended June 30, 2008, professional fees amounted to $380,520 as compared to $0 in the 2007 period. Included in professional fees are legal fees of $132,739, audit fees of $95,520, investor relation fees of $74,107, and other professional fees.

·

Payroll and related benefits increased for the six months ended June 30, 2008 by $199,892, or 883.3%, as compared to the six months ended June 30, 2007. In November 2007, we hired additional personnel in accounting, our chief financial officer, a translator, and administration staff due to our increased operations and additional workload in connection with being a public company. Additionally, the increase in payroll and related benefits reflected stock based compensation of $75,000 resulting from the issuance of common stock to two independent directors.

·	Travel expense for the six months ended June 30, 2008 increased by $18,228, or 21.7%, as compared to the six months ended June 30, 2007. The increase is related to increased travel by sales personnel and engineers.

·	Bad debts expenses increased by $36,331 for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 based on our analysis of accounts receivable balances.

·	Other selling, general and administrative expenses increased by $228,075 for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 due to increased operations.

·	Increases in revenues for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 are attributable to similar explanations provided in our discussion of results of operations for the six month period.

·	Since the share exchange in November 2007, we have incurred professional fees, principally as a result of our status as a public company. For the three months ended June 30, 2008, professional fees amounted to $138,815 as compared to $0 in the 2007 period.

·

Payroll and related benefits increased for the three months ended June 30, 2008 by $85,451, or 495.3%, as compared to the three months ended June 30, 2007. In November 2007, we hired additional personnel in accounting, our chief financial officer, a translator, and administration staff due to our increased operations and additional workload in connection with being a public company. Additionally, the increase in payroll and related benefits reflected stock based compensation of $30,000 resulting from the issuance of common stock to an independent director,

·	Travel expense in 2008 decreased by $25,415, or 56.2%, as compared to the three months ended June 30, 2007.

·	Bad debts expenses increased by $36,331 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 based on our analysis of accounts receivable balances.

·	Other selling, general and administrative expenses increased by $118,287 for the three months ended June 30, 2008 as compared with the three months ended June 30, 2007.

·

We agreed to have appointed such number of independent directors that would result in a majority of its directors being independent directors, that the audit committee would be composed solely of not less than three independent directors and the compensation committee would have at least three directors, a majority of which shall be independent directors within 90 days after the closing, which was February 11, 2008. Failure to meet this date will result in liquidated damages commencing February 12, 2008, until the date on which the requirement is satisfied. Thereafter, if we do not meet these requirements for a period of 60 days for an excused reason, as defined in the Purchase Agreement, or 75 days for a reason that is not an excused reason, this would result in the imposition of liquidated damages. The investors have agreed to waive through June 30, 2008 any liquidated damages related to the appointment of independent directors and the establishment of the committees. In March 2008, we elected independent directors and have the required committees.

·

We agreed to have a qualified chief financial officer who may be a part-time chief financial officer until February 13, 2008. If we cannot hire a qualified chief financial officer promptly upon the resignation or termination of employment of a former chief financial officer, we may engage an accountant or accounting firm to perform the duties of the chief financial officer. In no event shall we either (i) fail to file an annual, quarter or other report in a timely manner because of the absence of a qualified chief financial officer, or (ii) not have a person who can make the statements and sign the certifications required to be filed in an annual or quarterly report under the Securities Exchange Act of 1934.

·

Liquidated damages for failure to comply with the preceding two covenants are computed in an amount equal to 12% per annum of the purchase price, up to a maximum of 12% of the purchase price, which is $663,000, which is payable in cash or Series A preferred stock valued at $0.374 per share, at the election of the investors.

·

We and the investors entered into a registration rights agreement pursuant to which we agreed to file, by January 12, 2008, a registration statement covering the common stock issuable upon conversion of the series A preferred stock and exercise of the warrants and to have the registration statement declared effective by June 11, 2008. Our failure to have the registration statement declared effective by June 11, 2008 and other timetables provided in the registration rights agreement would result in the imposition of liquidated damages, which are payable through the issuance of additional shares of Series A preferred stock at the rate of 4,860 shares of Series A preferred stock for each day, based on the proposed registration of all of the underlying shares of common stock, with a maximum of 1,770,000 shares. The number of shares issuable per day is subject to adjustment if we cannot register all of the required shares as a result of the SEC’s interpretation of Rule 415. The registration rights agreement also provides for additional demand registration rights in the event that the investors are not able to register all of the shares in the initial registration statement. We filed a registration on February 14, 2008 and the registration statement was declared effective on June 13, 2008. We did not incur any liquidated damages under the registration rights agreement.

·	The Investors have a right of first refusal on future financings.

·	Until the earlier of November 13, 2011 or such time as the Investors shall have sold all of the underlying shares of common stock, we are restricted from issuing convertible debt or preferred stock.

·	Until the earlier of November 13, 2010 or such time as the Investors have sold 90% of the underlying shares of common stock, our debt cannot exceed twice the preceding four quarters earnings before interest, taxes, depreciation and amortization.

·	Our officers and directors agreed, with certain limited exceptions, not to publicly sell shares of common stock for 27 months or such earlier date as all of the convertible securities and warrants have been converted or exercised and the underlying shares of common stock have been sold.

·	We paid Barron Partners $30,000 for its due diligence expenses.

·

We entered into an escrow agreement pursuant to which we issued our 3% convertible promissory note due March 31, 2008 in the principal amount of $3,000,000, which is in addition to the notes in the principal amount of $5,525,000 which were issued to the investors. Upon the filing of the restated certificate of incorporation and the certificate of designation relating to the Series A preferred stock, this note automatically converted into 24,787,135 shares of Series A preferred stock. The series A preferred stock are held in escrow subject to the following.

·

14,787,135 shares are held pursuant to the following provisions. If, for either the year ended December 31, 2007 or 2008, our pre-tax earnings per share are less than the target numbers, all or a portion of such shares are to be delivered to the investors. If, for either year, the pre-tax earnings are less than 50% of the target, all of the shares are to be delivered to the investors. If the shortfall is less than 50%, the number of shares to be delivered to the investors is determined on a formula basis. The target number for 2007 was met and there were no deliveries from escrow.

·

The target number for 2008 is $0.13131 per share. The per share numbers are based on all shares that are outstanding or are issuable upon exercise or conversion of all warrants or options, regardless of whether such shares would be used in computing diluted earnings per share under GAAP. Based on the formula in the agreement, there is no adjustment for 2007.

·	If we do not file our Form 10-K for 2008 within 30 days after the filing is required, after giving effect to any extension permitted by Rule 12b-25 under the Securities Exchange Act of 1934, any shares remaining in escrow shall be delivered to the Investors.

·

The remaining 10,000,000 shares of Series A preferred stock are to be delivered to the Investors in the event that, based on our audited financial statements for 2007 or 2008 we or certain affiliated companies owes any taxes to the PRC government or any authority or taxing agency of the PRC for any period ended on or prior to September 30, 2007. For each $1.00 of such tax liability, four shares of Series A preferred stock are to be delivered to the Investors. At December 31, 2007, we did not have any tax liabilities covered by this covenant, as a result of which there was no delivery from escrow with respect to 2007.

·

With certain exceptions, until the investors have sold all of the underlying shares of common stock, if we sell common stock or issues convertible securities with a conversion or exercise price which is less than the conversion price of the Series A preferred stock and the exercise price of the warrants is reduced to the lower price.

(1)	Bank indebtedness include short term bank loans and notes payable.